Good morning Senators and staff. My name is Michael Gravitz and I am the Oceans Advocate for the U.S. Public Interest Research Group, the national program and lobby office of the State PIRG’s. I appreciate the opportunity to appear before you today to testify on this bill and to answer any questions you may have for me. With your permission I would like my printed testimony to be entered into the record as I will considerably shorten my remarks. I have been asked to confine my remarks to a review of S. 2253, a bill “To require the Secretary of Interior to offer the 181 Area of the Gulf of Mexico of oil and gas leasing” and I will attempt to do so, though there are a number of other bills and Administration plans that include some of the same areas covered in this bill. So it seems proper to briefly refer to some of those proposals as well.

Understanding of the Area Covered by S. 2253 and Timing of Lease SaleI am not aware of any official map, acreage delineation, or official estimate of energy resources that was released concurrent to the introduction of this bill. Newspaper sources and committee staff have stated that the area covers approximately 3.6 million acres and contains an estimated 6 TCF of natural gas and 930 million barrels of oil. From the bill, the areas boundaries are: the Military Mission line to the east, to the north a line at least 100 miles south of the coast of Florida’s panhandle, to the west the western edge of Lease Sale 181, and to the south the southern boundary of Lease Sale 181.

According to the proposed bill, the area would be offered by lease ‘as soon as practicable, but not later than I year, after enactment…’. Let’s assume leasing is completed by early 2007, one year from now. The interval between leasing and production can vary widely for a number of reasons, and U.S. PIRG has not studied this issue. But we believe, based on the most optimistic industry practices, that geophysical exploration might begin in 2007 or 2008, exploratory drilling by 2009 or 2010, and production could begin a year thereafter in 2011 or 2012. Therefore at the earliest, we believe there would be a five or six years interval until we saw the first production from this area. This would be a very optimistic timeframe.

OverviewU.S. PIRG opposes this bill for a number of important reasons:

• A drilling program of this size constitutes a measurable hazard to the marine environment of the eastern Gulf of Mexico and to nearby coastal resources like beaches and environmentally sensitive areas and species. In other words, the drilling program proposed will lead to a certain amount of environmental damage detailed below.

• The natural gas and oil (6 TCF and 930 million barrels respectively) estimated to be recoverable in this area will do little or nothing to help us deal with high energy prices. It won’t solve the problem of high natural gas prices in the short run (1-3 years) because the gas can’t be drilled that quickly, and can’t reduce prices significantly over the longer term (say 5 – 25 years) because there isn’t enough gas there compared to either annual U.S. production or consumption. Assuming a 20 year life for production of natural gas, the area would yield approximately 0.3 TCF on average per year which is approximately 1.5% of the total natural gas that the 2006 Annual Energy Outlook projects to be produced from all sources (both OCS and land) in 2015. I have used 2015 because it will take about 7 or 8 years after leasing for this field to be really brought on line.

In economic terms, over the 20-40 year life of the field that would be developed in Lease Area 181, the annual amount of gas or oil produced would not meaningfully shift the supply curve down and to the right on a typical price/quantity supply chart.

Let’s say, for the purposes of this discussion, that the price of natural gas were extremely responsive to even small changes in supply like this, that is very price elastic with respect to supply. Let’s say, again for the purposes of this discussion, that a 1.5% increase in supply could result in a 3% decline in price. This cu would be a price elasticity of 2.0. With natural gas at approximately $8.00 per thousand cubic feet, this would mean a decline of $0.24 per thousand cubic feet, surely not the major price relief that is claimed for this bill.

A Department of Energy, Energy Information Administration study done in 2001 (U.S. Natural Gas Markets: Mid-Term Prospects for Natural Gas Supply, SR/OIAF/2001-06) compared the price of natural gas with the OCS moratoria areas kept out of production and the price of natural gas with all of the moratoria areas opened for drilling in the 2007-2012 MMS 5 Year Plan. For the study, this meant that 58 TCF of gas was added to the existing 175 TCF of undiscovered technically recoverable resources thought to exist in the lower 48 states at the time, an increase in available gas of 33% and almost 10 times the amount of gas that is thought to exist in the Domenici-Bingaman area.

With all of its supply and demand information, DOE’s National Energy Model Modeling System (NEMS) predicted that the price of natural gas would be $3.26 per thousand cubic feet in 2020 without the gas under moratorium and $3.22 per thousand, or four (4) cents less with access to the additional gas in moratoria areas. This is a predicted price drop of a 1.2% from the addition of 10 times more gas reserves than would be freed up under this bill. Now clearly the model didn’t get the price of natural gas correct for 2006 let alone 2020 as natural gas is now approximately $8.00 per thousand cubic feet. But if the price of gas is $8.00 then the savings from having all of the lower 48 States OCS opened up is a decrease of around ten (10) cents per thousand cubic feet. Not nothing. But also not terribly significant either.

This is hardly major or even significant price relief. The effect is of such a magnitude that it would probably be drowned out by marketplace ‘noise’ or normal fluctuations or by catastrophic events we have no control over like the impact of a hurricane Katrina. Catastrophic events that effect production or distribution assets clearly have the ability to move prices much more than a mere addition of 5 TCF of technically recoverable resources.

For the oil resources estimated to be in the area, 930 million barrels is approximately 47 days worth of current U.S. consumption at our daily usage of approximately 20 million barrels per day. Of course, when the field comes on line, consumption may be higher and the actual benefit to the U.S. a briefer period of time.

• The vast majority –80%-- of the nation’s undiscovered technically recoverable OCS gas is located in areas that are already open to drilling, according to the Department of Interior’s 2006 Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural Gas Resources. There are estimated to be 86 TCF of Undiscovered Technically Recoverable Resources (UTRR Mean Estimate) in all OCS areas withdrawn from leasing compared to 479 TCF of Reserves, Reserve Appreciation and UTRR in the total OCS of the U.S. Therefore, all the potential gas placed off limits to drilling at present constitutes less than 20% of the gas thought to exist in the OCS.

• The area covered in this bill will not contribute appreciably to the supply of natural gas available for production in the Gulf. According to reports, the field may have 6 TCF in it; approximately 2% of the total natural gas (290 TCF of natural gas in the entire Gulf OCS are categorized as reserves, reserve appreciation, and undiscovered technically recoverable) thought to remain in the entire Gulf.

• U.S. PIRG firmly believes that the focus of energy development efforts should be on conservation savings and alternative sources of clean energy, not drilling for new sources. We could save this much oil (930 million barrels) in less than two years simply by requiring auto makers to close the light truck loophole – that is, make SUV’s, minivans and pickups meet the same gas mileage standards as cars. We support efforts to pass legislation which saves energy and encourages the switch to cleaner sources of energy.

To summarize these main objections, U.S. PIRG believes that drilling in this large an area of 181 is likely to damage the marine environment of the Gulf and coastal beaches which the local tourist economy depends on. The program will fail to have an appreciable impact on oil or natural gas prices in the short or long term. Moreover, the proposed drilling is bad energy policy because it does nothing to either save energy or produce new clean energy such as would come from wind, solar or biomass sources. Even the President has admitted that the U.S. is addicted to oil. Drilling for more oil only feeds the habit and does nothing to help solve the underlying problem.

Environmental ProblemsEnvironmental problems which come with oil and gas drilling fall into three categories: • One-time problems related to exploration and drilling • Chronic problems related to oil spills from production and accidents• Catastrophic problems related to extreme weather events such as the hurricanes Katrina and Rita that pummeled the Gulf last summer

One-time problemsIn order to explore for offshore energy, companies employ seismographic techniques that use high energy sound to penetrate the earth’s layers. These surveys can damage local fish populations and the hearing and navigation of large marine mammals. Some of these large marine mammals like sea turtles and whales do live and travel through the eastern Gulf.

Drilling platforms each produce an average of 180,000 gallons of drilling mud and cuttings for every well drilled. Most of this waste is dumped back into the ocean even though it contains toxic metals including mercury and lead. Significant concentrations of these metals can be found around drilling platforms in the central and western Gulf and have been shown to bioaccumulate their way up into the food chain into fish. Because oil rigs tend to attract populations of fish and because the pollution is concentrated around rigs, the problem is exacerbated.

Drilling produces a lot of air pollution from the equipment that drives the rig. Each rig produces 50 tons of nitrogen oxides, 13 tons of carbon monoxide, 6 tons of sulfur dioxide, and five tons of volatile organic hydrocarbons during the exploration phase. Put lots of rigs together and you get quite a lot of air pollution coming from one area.

Construction of oil and gas pipelines to bring the materials back to shore requires seafloor disturbance which suspends sediments and can create mounds on the seafloor which interfere with commercial fishing. Nearshore habitat can be destroyed or damaged wherever pipelines come on land. Many experts think that bringing gas and oil pipelines onshore through coastal wetlands has been one of the prime reasons for the rapid erosion and loss of protective wetland areas in Louisiana. These areas protect the shoreline and neighboring communities from the damage of extreme storm events.

Onshore oil and gas processing facilities can contribute to air and water pollution and industrialize the shoreline. If oil and gas from this lease sale move back to the Louisiana shore through existing pipelines some of these problems could be avoided. But then, of course, you are typically using increasingly aged pipelines as you get closer and closer to shore where the pipelines were built first.

Chronic problems Chronic problems result from oil spills from production platforms, pipelines and other transport back to shore by barge or tanker. In addition, active wells often release ‘produced water’ back into the environment. These produced waters coming from deep below the seabed can contain heavy metals and in the Gulf sometimes contain elevated levels of radium compounds which are released into the environment.

Over time the oil and gas industry have improved technology, vigilance, and understanding of how to prevent spills by leaps and bounds. However, spills still occur every year in the Western and Central Gulf. Interestingly, spills are 7 to 10 times more likely to come from pipelines than platforms and about 5 times more likely to come from tankers or barge transportation than platforms. Unfortunately, pipelines which are the most difficult element in the entire chain of production to monitor and correct are also the most likely source of spills according to this information which summarizes spill data over 15 years. And as more new fields are opened farther and farther offshore which connect to old pipelines closer to shore, one might expect the older inshore pipelines to be a larger source of the problem. Obviously leaks and spills closer to shore are more harmful to coastal resources than ones farther out.

That said, anyone who claims that spills no longer occur because the industry is so sophisticated and the regulators so vigilant has not been looking at the newspapers or MMS, Coast Guard, or the National Response Center reporting web site. There are plenty of reports of spills in the Gulf to choose from, including spills that occurred as a result of Hurricane Katrina in the Gulf, not just oil washed out into the Gulf from the shore.

Oil-Spill Risk Analysis for Lease Sale 181Extensive data on the probability of spills and the likelihood of a spill reaching important environmental resources comes from the Oil-Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf (OCS) in Support of the Environmental Impact Statement (EIS) for Proposed Lease Sale 181, Department of Interior, Minerals Management Service, Environmental Division, OCS Report MMS 2001-007. This report modeled where a hypothetical oil spill would go over a 3, 10, or 30 day period if it were released from any one of more than 600 different launch points within lease sale 181. Using real wind and current data from a 9 year period, the model calculated where the oil would go and whether it would touch either a coastal segment of land in LA, MS, AL, or FL or contaminate a number of highly important environmental resources like Big Bend Seagrass area of the coast of Florida or the Florida Gulf Island National Seashore.

We believe that the report actually underestimates the probability of spills and coastal pollution since it used a high estimate of 240 million barrels of oil from the entire Lease Sale 181, and we are now told that the smaller Domenici-Bingaman area will probably produce almost 4 times more oil, 930 million barrels. Since the number and probability of spills is directly proportional to the amount of oil produced, the estimates of damage coming from the report are therefore unrealistically low.

Nonetheless, the report concludes, “Spills from all the launch areas have an average probability of contacting the shoreline in the study area of 31 to 59 percent within 30 days of occurrence. With increased travel time, the complex patterns of wind and ocean currents produce eddy-like motions of the oil spills and multiple opportunities for a spill to make contact with any given environmental resource or shoreline segment”. pg 8.

Data shown below come directly from the report cited. We show the ‘maximum conditional probabilities’ because the maximum is based on production of 240 million barrels rather than the lower value of 30 million barrels also used for projections in the report. Obviously, the conditional probabilities of a spill contacting land would be even higher if they had used the new projection of 930 million barrels of oil. The table shows only land segments or resources where the probability of being hit by oil is above 10%.

Maximum Probabilities (expressed as a percent chance) that an oil spill will contact an environmental resource or land segment within 3, 10, or 30 days for Total Sale Area

Our conclusion based on this MMS report which we now believe substantially underestimates the likelihood of an oil spill reaching coastal resources is that there will be oil spills of significant size (above 1,000 barrels) and that some of those spills will strike the coasts.

Catastrophic Events When hurricanes strike the Gulf Coast they can generate wind in excess of 125 mph. Last summer’s hurricanes Ivan, Katrina, and Rita were a testament to the awesome power that these storms have to damage or destroy offshore and onshore oil and gas facilities. The Incident Summary from NOAA’s Office of Response and Restoration estimates an actual release of 7 million gallons of oil into the Gulf from at least 44 sites on land. By comparison, the Exxon Valdez oil spill, the largest one in U.S. history, dumped about 11 million gallons of oil into the Prince William Sound of Alaska.

In 2005, the National Response Center which is supposed to receive reports from all Federal agencies about oil and hazardous material spills reported 1,896 incidents from pipelines and 1,395 incidents from platforms.

According to the Mobile Register in a September 21, 2005 story titled, “Offshore Rigs Not Built to Handle Strongest Storms” which based on information from Federal reports, there were at least 64 spills associated with Gulf platforms following Katrina. Katrina destroyed 46 platforms and significantly damaged another 16, according to the American Petroleum Institute.

Some drilling rigs and platforms sank and disappeared, others became unanchored and floated way only to crash into bridges or the shore. Apparently, according to the Mobile Register article, most drilling rigs and production platforms are not designed to withstand the force of Category 5 hurricanes like Katrina that generate 100+ plus waves and 140 mph winds. Despite assurances to Congress, apparently the standards for oil rigs and platforms only mandate a design that would resist hurricanes between a Category 2 and 3 in strength. No wonder so many assets were damaged, blown away, or entirely lost.

A few specifics from a Bradenton Herald article of December 21, 2005 entitled “Hurricanes Wreak Environmental Disaster, Raising Concerns of Oil’s Future”. It reported that a Transocean drilling rig drifted for 80 miles before it was captured; another rig beached on Dauphin Island. The Mars platform, which is twice as tall as the Empire State Building, weighs 70 million pounds, and gathers oil from 16 wells was crippled by Katrina. During hurricane Ivan in 2004, a Taylor Energy platform sank and spilled 17,000 gallons of oil 19 miles off the LA coast.

Since November there have been at least three ship collisions between floating or submerged oil rig/platform debris in the Gulf. On November 11, 2005, one sunken platform ripped a 35 foot long hole in the hull of a double hulled tanker in the Gulf in November which released an estimated 1-3 million gallons of heavy fuel oil. This is one of the largest spills ever in the Gulf.

While seabed safety valves typically stop undersea wells from leaking if the platform above is damaged, this can’t be easily done for pipelines. When large storms hit, the underwater pipelines can be torn apart or damaged so that they leak. Many of the huge oil slicks on the Gulf after the recent hurricanes may come from pipeline leaks.

Attached to the back of this testimony are pictures taken from radar satellites of the Gulf of Mexico shortly after Katrina hit on September 2 and following days. The material was collected and interpreted by and organization called SkyTruth. The pictures can be found at www.skytruth.com. What they show is extensive oil slicks which appear to emanate from oil platforms, pipelines and shore facilities. The oil slicks covered over 500 square miles or over 300,000 acres of the Gulf on September 2nd which was three or four days after the hurricane struck.

What’s At Stake on the Florida CoastWhat’s at stake on the Florida Coast if oil from spills or storm related accidents hit the shore is clear. The western coast of Florida has an immense tourist economy based, in large part, on having clean beaches and a clean Gulf of Mexico to boat and fish in. The whole state had an estimated $550 billion gross state product in 2003 that is heavily dependent on tourism. In fact, approximately 60 million tourists visit Florida each year. Because visitors pay so much in sales and use taxes, the state has been able to avoid an income tax. Coastal property values, coastal tourism, and the multiplier effects of those expenditures are a huge part of Florida’s economy. According to the American Sportfishing Association, sportfishing generated $7.5 billion dollars of activity in Florida in 2001, much of which occurred in saltwater. Commercial fishery landings in 2001 were worth almost $120 million.

The eastern Gulf coastal waters are also home to a number of important environmentally sensitive areas like the Big Bend Seagrass Area and Tortugas Ecological Reserve. These reserves and coastal shoreline host a number of environmentally sensitive species such as:

• Sea Turtles• Whooping Cranes• Bald Eagles• Brown Pelicans• Manatees

Important beach areas include the: Florida Panhandle, the Big Bend area, Southwest Florida, and Ten Thousand Islands. Al these could be effected by a large oil spill in the eastern Gulf with the beaches of the Florida Panhandle most at risk.

Alternatives to Drilling in Lease Sale 181If this country were to adopt quite straightforward energy conservation policies and techniques like improving the fuel economy of cars and trucks, providing incentives for better energy saving appliances and lighting, etc.; and if the country was exploiting even modest amounts of clean, alternative energy like wind and solar power, then drilling in environmentally sensitive places like the eastern Gulf of Mexico for the last drops of oil wouldn’t be necessary. But we waste so much energy today. We believe the government and Congress should invest their effort and our dollars in energy conservation programs and clean energy rather than in drilling debates.

There is some good news on this because some states have been quite busy on the renewable portfolio issue. By 2017, the renewable portfolio standards already enacted by the states will produce as much renewable power as would be produced by gas fired powerplants using 0.6 TCF of gas per year. That’s twice as much gas annually than the amount that the Domenici-Bingaman bill would produce from 181. It’s indicative of what states and the federal government could do on conservation and renewable energy to replace production of gas and oil from places like 181.

ConclusionU.S. PIRG and Florida PIRG both strongly oppose this energy bill. We feel that the natural gas to be found there will make, at best, a very marginal difference in the supply or price of gas in the future. The natural gas would not be available any time soon to address more immediate concerns about home heating costs, the price of nitrogen fertilizer, or feedstocks for chemical plants. No one can lease, explore, drill, and produce product quickly enough to address these real concerns in the short term. We suggest that a better way to address these concerns more quickly than by drilling in 181, would for this committee to look at a much larger emphasis on energy conservation and use of renewable energy supplies.

We do not believe that Florida’s beaches, coastal environment and marine resources should be sacrificed to lower the price of natural gas by pennies five to ten years from now.